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Writer's pictureSue Pitts

Extending Credit to Customers


By extending credit to your customers, you give them the option to purchase products or services today and pay for them at a later date. When your business accepts credit card payments and personal checks or invoices customers, it is essentially extending credit on the assumption that customers have the funds to pay for the transaction.












When you extend credit to customers through card payments, the credit card company manages the risk. When you extend credit through invoices or personal checks, you are responsible for verifying and accepting payments and managing the risks that come with them.

Extending credit through invoices is common in some industries such as construction or manufacturing, but may not be practical for every business. To decide if extending credit is right for your business, weigh the associated rewards and risks.

  1. The option of credit enables customers to focus less on prices, enhances customer relations, and has the potential to generate more sales.

  2. Extending credit costs money. When you sell something on credit, you will not have payment on hand and will need to temporarily recoup the cost from other areas of your operating capital.

  3. If customers don’t pay, you could be in for a long settlement process that may not end in your favor.

  4. Ask yourself if you have a significant business need to extend credit. Extending credit could be the factor that keeps your business afloat if it makes it easier for your customers to buy from you. Nevertheless, if it isn’t necessary it may not be worth the extra time and paperwork.

Establish Credit Practices

Before you extend credit to customers, be sure to establish detailed policies and understand consumer protection laws.

  1. Determine to whom you will extend credit such as individual customers or other businesses. Run credit checks on all customers before you agree to extend credit.

  2. Develop clear, consistent payment guidelines. Your bills should indicate when payment is due when it will be considered delinquent, and who to contact with questions.

  3. Determine how you will bill or invoice customers. Will you or your employees mail requests for payment yourselves, or will you hire another company to handle invoicing?

  4. Create a plan for collecting late or defaulted payments. Regardless of the type of application or documents you use for credit transactions, be sure to get all of your customers’ information in writing. In return, provide them with a copy of your payment policy, which spells out how penalties will be applied to late payments and how you will handle unpaid bills. It’s important to have this documentation in case a fraudulent or delinquent credit transaction occurs.

Comply With Consumer Credit Laws

If your business extends credit to customers, you should become aware of consumer credit laws. The Federal Trade Commission (FTC) enforces the nation’s consumer protection laws. These laws regulate how you advertise interest rates, how much time you have to respond to billing-mistake claims, how aggressive you can be when attempting to collect a debt, and other aspects of extending credit and debt collections.

Dealing With Bankrupt Customers and Collecting Debt

What happens when a customer refuses to pay a bill? When you’ve gone beyond adding late penalties and you still haven’t seen any payment, check with your local consumer protection agency to understand your options and state laws. This information will help you decide if you should report these actions to the police, employ a collection agency, or attempt to settle the payment by other means. Depending on your local laws and the severity of the delinquent transactions, it may be cheaper to simply swallow the debt.

You may find yourself in a situation where a customer to whom you’ve extended credit declares bankruptcy. In this instance, the debtor then has the benefit of an automatic stay immediately upon filing a bankruptcy petition. This stay stops you from taking any further action of trying to collect the debt unless or until the bankruptcy court decides otherwise.

If a money judgment is awarded to you in court, further action may still be needed to receive payment. Such action may include contacting the defendant, or in some cases, providing information about the defendant to a law enforcement officer so that they can assist you in collecting the debt.

The best way to solve these situations is by preventing them from happening through strict credit policies and by conducting appropriate evaluations of credit risks before extending any credit.

Mechanics’ Liens

Mechanics’ and material men’s liens have specific regulations that apply to their industries in cases where credited customers fail to make their payments. Liens exist in most states to provide special collection rights to those who provide services or building materials used to improve real property. If the debt is not paid, the lien can be foreclosed and the property sold to pay the obligation. For more information on the specific laws that govern these debts, visit your state’s Department of Consumer Affairs or Protection.

If you would like more information on extending credit to your customers, visit with an SBDC Small Business Counselor. 

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